Thursday, July 02, 2020

[Anonymous]

UOA for July 2

1. Stocks hit resistance ahead of holiday weekend
2. Will money flow towards the Utility sector?
3. Pandemic winners still winning

Market Moves
Stocks opened higher after optimistic news from the Nonfarm Payroll report released by the U.S. Department of Labor this morning. However the benchmark indexes seemed to hit resistance as they sold off throughout the session going into the long weekend. The S&P 500 (SPX), the Nasdaq 100 (NDX), and the Dow Jones Industrial Average (DJI) all closed higher, while the Russell 2000 (RUT) closed lower.

A more subtle signal in the chart below demonstrates that each of the charts was left with a red candle today. This could turn out to be a new lower high point if stocks continue lower next Monday. While this seems obvious by looking at the chart, there are some reasons it may not happen. Chart watchers may anticipate higher prices for reasons that do not appear on these charts. The first of which is what will happen over the coming few weeks: earnings season. Investors may show patience between now and then.

Will Money Flow Towards the Utility Sector?

The chart below compares State Street’s Utility sector index fund (XLU) with the most influential stock in that sector: NextEra Energy (NEE). It is usually the case that when investors are nervous, utility company stocks go higher, or at least don’t fall as much as stocks in other sectors. The reason for this is that fund managers look to this sector for safety amid market turmoil. However, the main reason Utility stocks are on the rise right now has more to do with Fed policy than investor fear. The dynamic driving this stock higher appears to be a function of market mechanics shifting money around for optimized gains related to interest rates.

Pandemic Winners Still Winning
There is another indication that the resistance in the indexes may be inconsequential over the next several days. Many stocks that have had stellar gains during the rebound from pandemic-induced lows are hanging on to their eye-popping gains. There are several that could be featured, but consider the chart below which compares two noteworthy examples: Amazon (AMZN) and Twilio (TWLO).

These two companies are seeing their business models rewarded handsomely during the pandemic. Twilio’s recent news that they will power tracking-technology solutions has this company hitting amazing new highs.

If investors were scared that the market might collapse soon, they would not be sending this stock to such heights. The implication is that any uncertainty in the markets right now is not a function of investor panic–otherwise NEE would be outperforming TWLO.

The Bottom Line
Stocks opened higher on positive news from the U.S. Department of Labor this morning. Though the indexes drifted lower, the subtle details of market dynamics suggest that investors aren’t really panicked. If they were, a stock like TWLO would not have closed higher on the day while a stock like NEE closed lower.

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Ending on one chart and note of caution

The Nasdaq closed at an all-time high for the fourth of July! As we know, new highs are just about the most bullish thing that can happen. However, Willie points out that market internals have been deteriorating over the past month, while price has been printing new highs. Momentum indicators, like the MACD (above), and RSI (not shown), have been negatively diverging from price. Breadth indicators like the % of stocks above their 50, and 200-day moving averages have also been weakening. Bulls want to see these breadth and momentum indicators hitting new highs along with price, rather than diverging like they are now. It’s hard to be aggressively bearish with price hitting new highs, but it’s important to be aware that there are signs of weakness under the surface.

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